How Alternative Energy Sources May Affect Future Oil Prices

The oil price shock from OPEC embargoes of the 1970s stimulated massive investments in energy conservation and alternative forms of energy.

However, dramatic successes in energy conservation, overproduction supply glut from increased oil exploration, tax changes and budget contraints have combined to slash alternative energy research in the United States and Europe. Meanwhile, Japan continues to support such research.

Short-term thinking also contributes to the lack of research investment in new energy areas, says Darrell Sala, principal economist at the Institute for Gas Technology in Chicago, about the potential for long-term energy problems that a lack of research creates. The lack of major technological breakthroughs in alternative energy research is also reducing research budgets, he adds.

President George Bush acknowledged the priority of science and technology during his campaign. His appointment of John Sununu, a Massachusetts Institute of Technology-trained engineer-turned-governor, as chief of staff may help the administration establish some coherence to funding national science and technology projects now competing for federal funds.

Bush also has indicated that he favors the safe use of nuclear power despite the news of government nuclear waste storage foul-ups and general public apprehension about nuclear power. Bush says the energy department "needs to cope with the nuclear side and also recognize this country still has a tremendous dependency on the hydrocarbon side."

Many energy analysts show little interest in compiling data on alternative energy sources because of the unfavorable outlook for substituting these sources for oil.

"Lower energy prices have reduced investment in virtually every alternative fuel. That's going to make us more vulnerable to (oil supply) interruptions as we move into an environment in the 1990s where we are more and more dependent on imported energy," warns Marion Stewart, vice president at National Economic Research Associates, White Plains, N.Y.

Import share shifts

A decade ago nearly 50% of the oil consumed in the United States was imported. By 1986, oil imports accounted for just 31% of U.S. consumption. However, imports reached an eight-year high of 43% of U.S. oil consumption in November.

"Our view and that of many other energy forecasters is that, by the mid-1990s, net petroleum imports will exceed U.S. production of crude oil and natural gas liquids," Stewart says. "In fact, our forecast that the United States will require 3.75 trillion cubic feet of natural gas in 1995 far exceeds current import capacity and points to either a rapid increase in pipeline capacity from Canada or a substantial runup in natural gas prices to stifle gas demand, he warns.

The current oil glut has helped to reduce conservation efforts as many U.S. consumers shift toward larger automobiles. The shift away from conservation has hurt the ethanol industry, especially as tax credits are phased out. In fact, ethanol's small-scale use depends entirely on government subsidies. Its production entails batch fermentation, and economies of scale for this process are limited.

However, according to a comprehensive survey, "The Outlook for Alternative Automotive Fuels," Bruce Neteschert, a vice president at National Economic Research Associates, argues that, if any alternative fuel shows potential for substantial growth in usage during the next decade, it is likely to be methanol.

Methanol is produced by the chemical processing of natural gas. It can benefit from economies of scale and offers an opportunity to use otherwise uneconomic remote gas deposits such as those at Prudhoe Bay, Alaska, where the conventional marketing of gas via a pipeline is uneconomical, Neteschert says. There is an abundance of such remotely located gas around the globe that could support widespread methanol use, he adds. …

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